(4) Inventories
The components of inventories were as follows:
In Millions
|
|
Aug. 30, 2020
|
|
|
May 31, 2020
|
Raw materials and packaging
|
$
|
436.3
|
|
$
|
392.2
|
Finished goods
|
|
1,286.4
|
|
|
1,142.6
|
Grain
|
|
78.5
|
|
|
93.6
|
Excess of FIFO over LIFO cost
|
|
(196.1)
|
|
|
(202.1)
|
Total
|
$
|
1,605.1
|
|
$
|
1,426.3
|
(5) Risk Management Activities
Many commodities we use in the production and distribution of our products are exposed to market price risks. We utilize derivatives to manage price risk for our principal ingredients and energy costs, including grains (oats, wheat, and corn), oils (principally soybean), dairy products, natural gas, and diesel fuel. Our primary objective when entering into these derivative contracts is to achieve certainty with regard to the future price of commodities purchased for use in our supply chain. We manage our exposures through a combination of purchase orders, long-term contracts with suppliers, exchange-traded futures and options, and over-the-counter options and swaps. We offset our exposures based on current and projected market conditions and generally seek to acquire the inputs at as close to our planned cost as possible.
We use derivatives to manage our exposure to changes in commodity prices. We do not perform the assessments required to achieve hedge accounting for commodity derivative positions. Accordingly, the changes in the values of these derivatives are recorded currently in cost of sales in our Consolidated Statements of Earnings.
Although we do not meet the criteria for cash flow hedge accounting, we believe that these instruments are effective in achieving our objective of providing certainty in the future price of commodities purchased for use in our supply chain. Accordingly, for purposes of measuring segment operating performance, these gains and losses are reported in unallocated corporate items outside of segment operating results until such time that the exposure we are managing affects earnings. At that time we reclassify the gain or loss from unallocated corporate items to segment operating profit, allowing our operating segments to realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in unallocated corporate items.
Unallocated corporate items for the quarters ended August 30, 2020, and August 25, 2019, included:
|
Quarter Ended
|
In Millions
|
|
Aug. 30, 2020
|
|
|
Aug. 25, 2019
|
Net gain (loss) on mark-to-market valuation of certain commodity positions
|
$
|
10.4
|
|
$
|
(20.7)
|
Net loss on commodity positions reclassified from unallocated corporate items to segment operating profit
|
|
12.0
|
|
|
11.3
|
Net mark-to-market revaluation of certain grain inventories
|
|
(6.0)
|
|
|
(5.6)
|
Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items
|
$
|
16.4
|
|
$
|
(15.0)
|
As of August 30, 2020, the net notional value of commodity derivatives was $252.7 million, of which $74.7 million related to energy inputs and $178.0 million related to agricultural inputs. These contracts relate to inputs that generally will be utilized within the next 12 months.
In advance of planned debt financing, in the fourth quarter of fiscal 2020, we entered into $300 million of treasury locks due January 13, 2022 with an average fixed rate of 0.85 percent.
During the third quarter of fiscal 2020, we entered into a €600 million interest rate swap to convert our €600 million fixed rate notes due January 15, 2026, to a floating rate.
During the second quarter of fiscal 2020, we entered into a $500 million interest rate swap to convert a portion of our $850 million floating-rate notes due April 16, 2021, to a fixed rate.
The fair values of the derivative positions used in our risk management activities and other assets recorded at fair value were not material as of August 30, 2020, and were Level 1 or Level 2 assets and liabilities in the fair value hierarchy. We did not significantly change our valuation techniques from prior periods.
(13) Income Taxes
During the first quarter of fiscal 2020, we reorganized certain wholly owned subsidiaries, including the movement of certain assets between legal entities. As a result of these actions, we recorded a $53.1 million decrease to our deferred income tax liabilities, with a corresponding discrete, non-cash reduction to income taxes in the first quarter of fiscal 2020.
(14) Contingencies
During fiscal 2020, we received notice from the tax authorities of the State of São Paulo, Brazil regarding our compliance with its state sales tax requirements. As a result, we have been assessed additional state sales taxes, interest, and penalties. We believe that we have meritorious defenses against this claim and will vigorously defend our position. As of August 30, 2020, we are unable to estimate any possible loss and have not recorded a loss contingency for this matter.
(15) Business Segment and Geographic Information
We operate in the packaged foods industry. Our operating segments are as follows: North America Retail; Europe & Australia; Pet; Convenience Stores & Foodservice; and Asia & Latin America.
Our North America Retail operating segment reflects business with a wide variety of grocery stores, mass merchandisers, membership stores, natural food chains, drug, dollar and discount chains, and e-commerce grocery providers. Our product categories in this business segment are ready-to-eat cereals, refrigerated yogurt, soup, meal kits, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza and pizza snacks, snack bars, fruit snacks, savory snacks, and a wide variety of organic products including ready-to-eat cereal, frozen and shelf-stable vegetables, meal kits, fruit snacks, snack bars, and refrigerated yogurt.
Our Europe & Australia operating segment reflects retail and foodservice businesses in the greater Europe and Australia regions. Our product categories include refrigerated yogurt, meal kits, snack bars, super-premium ice cream, refrigerated and frozen dough products, shelf stable vegetables, and dessert and baking mixes. Revenues from franchise fees are reported in the region or country where the franchisee is located.
Our Pet operating segment includes pet food products sold primarily in the United States in national pet superstore chains, e-commerce retailers, grocery stores, regional pet store chains, mass merchandisers, and veterinary clinics and hospitals. Our product categories include dog and cat food (dry foods, wet foods, and treats) made with whole meats, fruits, and vegetables and other high-quality natural ingredients. Our tailored pet product offerings address specific dietary, lifestyle, and life-stage needs and span different product types, diet types, breed sizes for dogs, lifestages, flavors, product functions and textures, and cuts for wet foods.
Our major product categories in our Convenience Stores & Foodservice operating segment are ready-to-eat cereals, snacks, refrigerated yogurt, frozen meals, unbaked and fully baked frozen dough products, baking mixes, and bakery flour. Many products we sell are branded to the consumer and nearly all are branded to our customers. We sell to distributors and operators in many customer channels including foodservice, convenience stores, vending, and supermarket bakeries in the United States.
Our Asia & Latin America operating segment consists of retail and foodservice businesses in the greater Asia and South America regions. Our product categories include super-premium ice cream and frozen desserts, meal kits, dessert and baking mixes, snack bars, salty snacks, refrigerated and frozen dough products, and wellness beverages. We also sell super-premium ice cream and frozen desserts directly to consumers through owned retail shops. Our Asia & Latin America segment also includes products manufactured in the United States for export, mainly to Caribbean and Latin American markets, as well as products we manufacture for sale to our international joint ventures. Revenues from export activities and franchise fees are reported in the region or country where the end customer or franchisee is located.
Operating profit for these segments excludes unallocated corporate items, gain or loss on divestitures, and restructuring, impairment, and other exit costs. Unallocated corporate items include corporate overhead expenses, variances to planned North American employee benefits and incentives, contributions to the General Mills Foundation, asset and liability remeasurement impact of hyperinflationary economies, restructuring initiative project-related costs, and other items that are not part of our measurement of segment operating performance. These include gains and losses arising from the revaluation of certain grain inventories and gains and losses from mark-to-market valuation of certain commodity positions until passed back to our operating segments. These items affecting operating profit are centrally managed at the corporate level and are excluded from the measure of segment profitability reviewed by executive management. Under our supply chain organization, our manufacturing, warehouse, and distribution activities are substantially integrated across our operations in order to maximize efficiency and productivity. As a result, fixed assets and depreciation and amortization expenses are neither maintained nor available by operating segment.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020 for important background regarding, among other things, our key business drivers. Significant trademarks and service marks used in our business are set forth in italics herein. Certain terms used throughout this report are defined in the “Glossary” section below.
As the COVID-19 pandemic continues, we expect the largest factor impacting our fiscal 2021 performance will be the relative balance of at-home versus away-from-home consumer food demand. At-home food demand has remained elevated relative to pre-pandemic levels, though it has moderated from the fourth quarter of fiscal 2020. We will continue to evaluate the nature and extent of the impact to our business and consolidated results of operations.
CONSOLIDATED RESULTS OF OPERATIONS
First Quarter Results
In the first quarter of fiscal 2021, net sales increased 9 percent and organic net sales increased 10 percent compared to the same period last year. Operating profit margin of 19.6 percent increased 310 basis points, primarily driven by favorable net price realization and mix, a larger increase in net sales as compared to the increase in selling, general, and administrative (SG&A) expenses, and a favorable change to the mark-to-market valuation of certain commodity positions and grain inventories. Adjusted operating profit margin increased 210 basis points to 19.1 percent compared to the same period last year, primarily driven by favorable net price realization and mix and a larger increase in net sales as compared to the increase in SG&A expenses. Diluted earnings per share of $1.03 increased 21 percent in the first quarter of fiscal 2021. Adjusted diluted earnings per share of $1.00 increased 27 percent on a constant-currency basis compared to the first quarter of fiscal 2020. See the “Non-GAAP Measures” section below for a description of our use of measures not defined by GAAP.
A summary of our consolidated financial results for the first quarter of fiscal 2021 follows:
Quarter Ended Aug. 30, 2020
|
In millions, except per share
|
|
Quarter Ended
Aug. 30, 2020 vs. Aug. 25, 2019
|
Percent
of Net
Sales
|
Constant-Currency Growth (a)
|
Net sales
|
$
|
4,364.0
|
|
9
|
%
|
|
|
|
|
Operating profit
|
|
853.7
|
|
29
|
%
|
19.6
|
%
|
|
|
Net earnings attributable to General Mills
|
|
638.9
|
|
23
|
%
|
|
|
|
|
Diluted earnings per share
|
$
|
1.03
|
|
21
|
%
|
|
|
|
|
Organic net sales growth rate (a)
|
|
|
|
10
|
%
|
|
|
|
|
Adjusted operating profit (a)
|
|
832.5
|
|
22
|
%
|
19.1
|
%
|
22
|
%
|
Adjusted diluted earnings per share (a)
|
$
|
1.00
|
|
27
|
%
|
|
|
27
|
%
|
(a) See the "Non-GAAP Measures" section below for our use of measures not defined by GAAP.
|
|
Consolidated net sales were as follows:
|
Quarter Ended
|
|
Aug. 30, 2020
|
|
Aug. 30, 2020 vs Aug. 25, 2019
|
Aug. 25, 2019
|
Net sales (in millions)
|
$
|
4,364.0
|
|
9%
|
|
$
|
4,002.5
|
Contributions from volume growth (a)
|
|
|
|
8
|
pts
|
|
|
Net price realization and mix
|
|
|
|
2
|
pts
|
|
|
Foreign currency exchange
|
|
|
|
(1)
|
pt
|
|
|
Note: Table may not foot due to rounding.
|
|
|
|
|
|
|
|
(a) Measured in tons based on the stated weight of our product shipments.
|
|
|
|
The 9 percent increase in net sales in the first quarter of fiscal 2021 reflects increased contributions from volume growth and favorable net price realization and mix, partially offset by unfavorable foreign currency exchange.
Components of organic net sales growth are shown in the following table:
Quarter Ended Aug. 30, 2020 vs.
|
|
|
Quarter Ended Aug. 25, 2019
|
|
|
Contributions from organic volume growth (a)
|
|
8 pts
|
Organic net price realization and mix
|
|
2 pts
|
Organic net sales growth
|
|
10 pts
|
Foreign currency exchange
|
|
(1)pt
|
Net sales growth
|
|
9 pts
|
Note: Table may not foot due to rounding.
|
|
|
(a) Measured in tons based on the stated weight of our product shipments.
|
Organic net sales increased 10 percent in the first quarter of fiscal 2021 primarily driven by increased contributions from organic volume growth and favorable organic net price realization and mix.
Cost of sales increased $161 million to $2,774 million in the first quarter of fiscal 2021 compared to the same period in fiscal 2020. The increase was primarily driven by a $198 million increase due to higher volume, partially offset by a $7 million decrease attributable to product rate and mix. We recorded a $16 million net decrease in cost of sales related to the mark-to-market valuation of certain commodity positions and grain inventories in the first quarter of fiscal 2021 compared to a net increase of $15 million in the first quarter of fiscal 2020. In the first quarter of fiscal 2021, we recorded a $7 million charge related to a product recall in our international Green Giant business. In addition, we recorded an insignificant amount of restructuring charges in cost of sales in the first quarter of fiscal 2021 compared to $6 million in the first quarter of fiscal 2020 (please refer to Note 2 to the Consolidated Financial Statements in Part I, Item 1 of this report).
SG&A expenses increased $17 million to $736 million in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, primarily reflecting increased other consumer-related expenses and increased media and advertising expenses, partially offset by lower administrative expenses. SG&A expenses as a percent of net sales in the first quarter of fiscal 2021 decreased 110 basis points compared to the first quarter of fiscal 2020.
Restructuring, impairment, and other exit costs were insignificant in the first quarter of fiscal 2021 compared to $8 million in the same period last year.
Benefit plan non-service income totaled $33 million in the first quarter of fiscal 2021 compared to $30 million in the same period last year, primarily reflecting lower interest costs, partially offset by lower expected return on plan assets.
Interest, net for the first quarter of fiscal 2021 totaled $111 million, down $8 million from the first quarter of fiscal 2020, primarily driven by lower average debt levels, partially offset by a change in the mix of debt.
The effective tax rate for the first quarter of fiscal 2021 was 22.0 percent compared to 11.7 percent for the first quarter of fiscal 2020. The 10.3 percentage point increase was primarily due to nonrecurring net benefits related to a reorganization of certain wholly owned subsidiaries and certain international discrete tax benefits recorded in the first quarter of fiscal 2020, partially offset by changes in earnings mix by jurisdiction in fiscal 2021. Our adjusted effective tax rate was 21.9 percent in the first quarter of fiscal 2021 compared to 20.9 percent in the first quarter of fiscal 2020 (see the “Non-GAAP Measures” section below for a description of our use of measures not defined by GAAP). The 1 percentage point increase in the adjusted effective tax rate was primarily due to certain nonrecurring international discrete tax benefits recorded in the first quarter of fiscal 2020, partially offset by changes in earnings mix by jurisdiction in fiscal 2021.
After-tax earnings from joint ventures for the first quarter of fiscal 2021 increased to $41 million compared to $22 million in the same period in fiscal 2020, primarily driven by higher net sales and lower input costs at Cereal Partners Worldwide (CPW). On a constant-currency basis, after-tax earnings from joint ventures increased 88 percent (see the “Non-GAAP Measures” section below for a description of our use of measures not defined by GAAP). The components of our joint ventures’ net sales growth are shown in the following table:
Quarter Ended Aug. 30, 2020 vs.
|
|
|
|
|
|
|
|
Quarter Ended Aug. 25, 2019
|
|
CPW
|
HDJ (a)
|
Total
|
Contributions from volume growth (b)
|
|
7
|
pts
|
(6)
|
pts
|
|
|
Net price realization and mix
|
|
2
|
pts
|
5
|
pts
|
|
|
Net sales growth in constant currency
|
|
9
|
pts
|
(1)
|
pt
|
7
|
pts
|
Foreign currency exchange
|
|
(4)
|
pts
|
1
|
pt
|
(3)
|
pts
|
Net sales growth
|
|
5
|
pts
|
Flat
|
|
4
|
pts
|
Note: Table may not foot due to rounding.
|
|
|
|
|
|
|
|
(a) Häagen-Dazs Japan, Inc. (HDJ)
|
|
|
|
|
|
|
|
(b) Measured in tons based on the stated weight of our product shipments.
|
|
|
|
|
|
|
|
Average diluted shares outstanding increased by 8 million in the first quarter of fiscal 2021 from the same period a year ago due to option exercises.
SEGMENT OPERATING RESULTS
Our businesses are organized into five operating segments: North America Retail; Europe & Australia; Pet; Convenience Stores & Foodservice; and Asia & Latin America. Please refer to Note 15 of the Consolidated Financial Statements in Part I, Item 1 of this report for a description of our operating segments.
North America Retail Segment Results
North America Retail net sales were as follows:
|
Quarter Ended
|
|
Aug. 30, 2020
|
|
Aug. 30, 2020 vs Aug. 25, 2019
|
Aug. 25, 2019
|
Net sales (in millions)
|
$
|
2,707.0
|
|
14
|
%
|
$
|
2,376.1
|
Contributions from volume growth (a)
|
|
|
|
17
|
pts
|
|
|
Net price realization and mix
|
|
|
|
(2)
|
pts
|
|
|
Foreign currency exchange
|
|
|
|
Flat
|
|
|
|
Note: Table may not foot due to rounding.
(a) Measured in tons based on the stated weight of our product shipments.
North America Retail net sales increased 14 percent in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by an increase in contributions from volume growth, partially offset by unfavorable net price realization and mix.
The components of North America Retail organic net sales growth are shown in the following table:
|
|
|
|
|
|
Quarter Ended
|
|
|
Aug. 30, 2020
|
Contributions from organic volume growth (a)
|
|
17
|
pts
|
Organic net price realization and mix
|
|
(2)
|
pts
|
Organic net sales growth
|
|
14
|
pts
|
Foreign currency exchange
|
|
Flat
|
|
Net sales growth
|
|
14
|
pts
|
Note: Table may not foot due to rounding.
|
(a) Measured in tons based on the stated weight of our product shipments.
|
North America Retail organic net sales increased 14 percent in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by an increase in contributions from organic volume growth, partially offset by unfavorable organic net price realization and mix.
North America Retail net sales percentage change by operating unit are shown in the following table:
|
Quarter Ended
|
|
Aug. 30, 2020
|
U.S. Meals & Baking
|
31
|
%
|
U.S. Cereal
|
10
|
|
U.S. Yogurt and Other
|
5
|
|
U.S. Snacks
|
(2)
|
|
Canada (a)
|
3
|
|
Total
|
14
|
%
|
(a) On a constant-currency basis, Canada net sales increased 5 percent for the first quarter of fiscal 2021 compared to the same period in fiscal 2020. See the "Non-GAAP Measures" section below for our use of this measure not defined by GAAP.
Segment operating profit increased 24 percent to $695 million in the first quarter of fiscal 2021 compared to $560 million in the same period in fiscal 2020, primarily driven by an increase in contributions from volume growth and lower input costs, partially offset by unfavorable net price realization and mix and higher SG&A expenses, including increased media and advertising expenses. Segment operating profit increased 24 percent on a constant-currency basis in the first quarter of fiscal 2021 compared to the same period in fiscal 2020 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).
Europe & Australia Segment Results
Europe & Australia net sales were as follows:
|
|
|
Quarter Ended
|
|
|
Aug. 30, 2020
|
|
Aug. 30, 2020 vs. Aug. 25, 2019
|
|
Aug. 25, 2019
|
Net sales (in millions)
|
$
|
491.0
|
|
8
|
%
|
$
|
454.1
|
Contributions from volume growth (a)
|
|
|
|
(1)
|
pt
|
|
|
Net price realization and mix
|
|
|
|
6
|
pts
|
|
|
Foreign currency exchange
|
|
|
|
3
|
pts
|
|
|
Note: Table may not foot due to rounding.
|
(a) Measured in tons based on the stated weight of our product shipments.
|
Europe & Australia net sales increased 8 percent in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by favorable net price realization and mix and favorable foreign currency exchange, partially offset by a decrease in contributions from volume growth.
The components of Europe & Australia organic net sales growth are shown in the following table:
|
|
|
|
|
|
Quarter Ended
|
|
|
Aug. 30, 2020
|
Contributions from organic volume growth (a)
|
|
Flat
|
|
Organic net price realization and mix
|
|
7
|
pts
|
Organic net sales growth
|
|
7
|
pts
|
Foreign currency exchange
|
|
3
|
pts
|
Divestiture
|
|
(1)
|
pt
|
Net sales growth
|
|
8
|
pts
|
Note: Table may not foot due to rounding.
(a)Measured in tons based on the stated weight of our product shipments.
Europe & Australia organic net sales increased 7 percent in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by favorable organic net price realization and mix.
Segment operating profit increased 93 percent to $53 million in the first quarter of fiscal 2021 from $28 million in the same period in fiscal 2020, driven by favorable net price realization and mix. Segment operating profit increased 89 percent on a constant-currency basis in the first quarter of fiscal 2021 compared to the same period in fiscal 2020 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).
Pet Segment Results
Pet net sales were as follows:
|
|
|
Quarter Ended
|
|
|
Aug. 30, 2020
|
|
Aug. 30, 2020 vs Aug. 25, 2019
|
Aug. 25, 2019
|
Net sales (in millions)
|
$
|
391.7
|
|
6
|
%
|
$
|
367.8
|
Contributions from volume growth (a)
|
|
|
|
11
|
pts
|
|
|
Net price realization and mix
|
|
|
|
(4)
|
pts
|
|
|
Foreign currency exchange
|
|
|
|
Flat
|
|
|
|
Note: Table may not foot due to rounding.
|
(a) Measured in tons based on the stated weight of our product shipments.
|
Pet net sales increased 6 percent during the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by increased contributions from volume growth, partially offset by unfavorable net price realization and mix.
The components of Pet organic net sales growth are shown in the following table:
|
|
Quarter Ended
|
|
|
Aug. 30, 2020
|
Contributions from organic volume growth (a)
|
|
11
|
pts
|
Organic net price realization and mix
|
|
(4)
|
pts
|
Organic net sales growth
|
|
6
|
pts
|
Foreign currency exchange
|
|
Flat
|
|
Net sales growth
|
|
6
|
pts
|
Note: Table may not foot due to rounding.
|
(a) Measured in tons based on the stated weight of our product shipments.
|
Segment operating profit increased 12 percent to $90 million in the first quarter of fiscal 2021 compared to $81 million in the same period in fiscal 2020, primarily driven by an increase in contributions from volume growth and lower input costs, partially offset by unfavorable net price realization and mix and higher SG&A expenses, including increased media and advertising expenses. Segment operating profit increased 12 percent on a constant-currency basis in the first quarter of fiscal 2021 compared to the same period in fiscal 2020 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).
Convenience Stores & Foodservice Segment Results
Convenience Stores & Foodservice net sales were as follows:
|
Quarter Ended
|
|
Aug. 30, 2020
|
|
Aug. 30, 2020 vs Aug. 25, 2019
|
|
Aug. 25, 2019
|
Net sales (in millions)
|
$
|
391.6
|
|
(12)
|
%
|
$
|
445.0
|
Contributions from volume growth (a)
|
|
|
|
(9)
|
pts
|
|
|
Net price realization and mix
|
|
|
|
(3)
|
pts
|
|
|
Note: Table may not foot due to rounding.
|
(a) Measured in tons based on the stated weight of our product shipments.
|
Convenience Stores & Foodservice net sales decreased 12 percent in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by a decrease in contributions from volume growth and unfavorable net price realization and mix.
The components of Convenience Stores & Foodservice organic net sales growth are shown in the following table:
|
|
|
|
|
Quarter Ended
|
|
|
Aug. 30, 2020
|
Contributions from organic volume growth (a)
|
|
(9)pts
|
Organic net price realization and mix
|
|
(3)pts
|
Organic net sales growth
|
|
(12)pts
|
Net sales growth
|
|
(12)pts
|
Note: Table may not foot due to rounding.
(a) Measured in tons based on the stated weight of our product shipments.
Segment operating profit decreased 24 percent to $70 million in the first quarter of fiscal 2021 compared to $91 million in the same period in fiscal 2020, primarily driven by unfavorable net price realization and mix and a decrease in contributions from volume growth.
Asia & Latin America Segment Results
Asia & Latin America net sales were as follows:
|
|
|
Quarter Ended
|
|
|
Aug. 30, 2020
|
|
Aug. 30, 2020 vs. Aug. 25, 2019
|
|
Aug. 25, 2019
|
Net sales (in millions)
|
$
|
382.7
|
|
6
|
%
|
$
|
359.5
|
Contributions from volume growth (a)
|
|
|
|
20
|
pts
|
|
|
Net price realization and mix
|
|
|
|
(4)
|
pts
|
|
|
Foreign currency exchange
|
|
|
|
(10)
|
pts
|
|
|
Note: Table may not foot due to rounding.
|
(a) Measured in tons based on the stated weight of our product shipments.
|
Asia & Latin America net sales increased 6 percent in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by an increase in contributions from volume growth, partially offset by unfavorable foreign currency exchange and unfavorable net price realization and mix.
The components of Asia & Latin America organic net sales growth are shown in the following table:
|
|
|
|
|
|
Quarter Ended
|
|
|
Aug. 30, 2020
|
Contributions from organic volume growth (a)
|
|
20
|
pts
|
Organic net price realization and mix
|
|
(4)
|
pts
|
Organic net sales growth
|
|
17
|
pts
|
Foreign currency exchange
|
|
(10)
|
pts
|
Net sales growth
|
|
6
|
pts
|
Note: Table may not foot due to rounding.
(a) Measured in tons based on the stated weight of our product shipments.
Asia & Latin America organic net sales increased 17 percent in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by an increase in contributions from organic volume growth, partially offset by unfavorable organic net price realization and mix.
Segment operating profit increased 99 percent to $20 million in the first quarter of fiscal 2021 from $10 million in the same period in fiscal 2020, driven by an increase in contributions from volume growth, partially offset by unfavorable net price realization and mix.
Segment operating profit increased 68 percent on a constant-currency basis in the first quarter of fiscal 2021 compared to the same period in fiscal 2020 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).
UNALLOCATED CORPORATE ITEMS
Unallocated corporate expense totaled $74 million in the first quarter of fiscal 2021 compared to $99 million in the same period in fiscal 2020. We recorded a $16 million net decrease in expense related to the mark-to-market valuation of certain commodity positions and grain inventories in the first quarter of fiscal 2021 compared to a $15 million net increase in expense in the same period last year. We recorded $13 million of net gains related to valuation adjustments of certain corporate investments in the first quarter of fiscal 2021 compared to $10 million of net gains related to valuation adjustments and the loss on the sale of certain corporate investments in the first quarter of fiscal 2020. We also recorded a $7 million charge related to a product recall in our international Green Giant business in the first quarter of fiscal 2021. We recorded an immaterial amount of restructuring charges in cost of sales in the first quarter of fiscal 2021 compared to $6 million in the same period last year.
LIQUIDITY
During the first quarter of fiscal 2021, cash provided by operations was $584 million compared to $572 million in the same period last year. The $12 million increase was primarily driven by a $118 million increase in net earnings, partially offset by a $73 million change in current assets and liabilities and a $20 million increase in after-tax earnings from joint ventures. The $73 million change in current assets and liabilities was primarily driven by a $60 million change in prepaid expenses and other current assets mainly due to the timing of certain tax payments and receipts.
Cash used by investing activities during the first quarter of fiscal 2021 was $123 million compared to $84 million for the same period in fiscal 2020. Investments of $117 million in land, buildings, and equipment in the first quarter of fiscal 2021 increased by $47 million compared to the same period a year ago.
Cash used by financing activities during the first quarter of fiscal 2021 was $373 million compared to $429 million in the same period in fiscal 2020. We had $81 million of net debt repayments in the first quarter of fiscal 2021 compared to $170 million of net debt repayments in the same period a year ago. We paid $303 million of dividends in the first quarter of fiscal 2021 compared to $298 million in the same period last year.
Our sources of liquidity were not materially impacted by the COVID-19 pandemic.
As of August 30, 2020, we had $650 million of cash and cash equivalents held in foreign jurisdictions. In anticipation of repatriating funds from foreign jurisdictions, we record local country withholding taxes on our international earnings, as applicable. As such, we may repatriate our cash and cash equivalents held by our foreign subsidiaries without such funds being subject to further U.S. income tax liability. Earnings prior to fiscal 2018 from our foreign subsidiaries remain permanently reinvested in those jurisdictions.
CAPITAL RESOURCES
Our capital structure was as follows:
In Millions
|
|
Aug. 30, 2020
|
|
|
May 31, 2020
|
Notes payable
|
$
|
162.7
|
|
$
|
279.0
|
Current portion of long-term debt
|
|
2,625.7
|
|
|
2,331.5
|
Long-term debt
|
|
10,832.9
|
|
|
10,929.0
|
Total debt
|
|
13,621.3
|
|
|
13,539.5
|
Redeemable interest
|
|
584.9
|
|
|
544.6
|
Noncontrolling interests
|
|
313.3
|
|
|
291.0
|
Stockholders' equity
|
|
8,444.6
|
|
|
8,058.5
|
Total capital
|
$
|
22,964.1
|
|
$
|
22,433.6
|
The following table details the fee-paid committed and uncommitted credit lines we had available as of August 30, 2020:
In Billions
|
|
Facility Amount
|
|
|
Borrowed Amount
|
Credit facility expiring:
|
|
|
|
|
|
May 2022
|
$
|
2.7
|
|
$
|
-
|
September 2022
|
|
0.2
|
|
|
-
|
Total committed credit facilities
|
|
2.9
|
|
|
-
|
Uncommitted credit facilities
|
|
0.7
|
|
|
0.1
|
Total committed and uncommitted credit facilities
|
$
|
3.6
|
|
$
|
0.1
|
|
|
|
|
|
|
We have a 51 percent controlling interest in Yoplait SAS and a 50 percent interest in Yoplait Marques SNC and Liberté Marques Sàrl. Sodiaal International (Sodiaal) holds the remaining interests in each of these entities. We consolidate these entities into our consolidated financial statements. We record Sodiaal’s 50 percent interests in Yoplait Marques SNC and Liberté Marques Sàrl as noncontrolling interests, and its 49 percent interest in Yoplait SAS as a redeemable interest on our Consolidated Balance Sheets. Sodiaal has the ability to put all or a portion of its redeemable interest to us at fair value once per year, up to three times before December 2024. As of August 30, 2020, the redemption value of the redeemable interest was $585 million, which approximates its fair value.
The third-party holder of the General Mills Cereals, LLC (GMC) Class A Interests receives quarterly preferred distributions from available net income based on the application of a floating preferred return rate to the holder’s capital account balance established in the most recent mark-to-market valuation (currently $252 million). On June 1, 2018, the floating preferred return rate on GMC’s Class A Interests was reset to the sum of three-month LIBOR plus 142.5 basis points. The preferred return rate is adjusted every three years through a negotiated agreement with the Class A Interest holder or through a remarketing auction.
We have an option to purchase the Class A Interests for consideration equal to the then current capital account value, plus any unpaid preferred return and the prescribed make-whole amount. If we purchase these interests, any change in the third-party holder’s capital account from its original value will be charged directly to retained earnings and will increase or decrease the net earnings used to calculate EPS in that period.
To ensure availability of funds, we maintain bank credit lines and have commercial paper programs available to us in the United States and Europe. In response to uncertainty surrounding the availability and cost of commercial paper borrowings as a result of the COVID-19 pandemic, we issued $750 million of fixed-rate notes in April 2020 and reduced our borrowings under commercial paper programs. As the COVID-19 pandemic evolves, we will continue to evaluate its impact to our sources of liquidity. We also have uncommitted and asset-backed credit lines that support our foreign operations.
Certain of our long-term debt agreements, our credit facilities, and our noncontrolling interests contain restrictive covenants. As of August 30, 2020, we were in compliance with all of these covenants.
We have $2,626 million of long-term debt maturing in the next 12 months that is classified as current, including $100 million of 6.61 percent fixed-rate medium-term notes due for remarketing in October 2020, €200 million of 0.00 percent notes due November 2020, $4 million of floating-rate medium term notes due for remarketing in November 2020, $850 million of floating-rate notes due April 2021, $600 million of 3.2 percent notes due April 2021, €200 million of 2.20 percent fixed-rate notes due June 2021, and €500 million of 0.00 percent fixed-rate notes due August 2021. We believe that cash flows from operations, together with available short- and long-term debt financing, will be adequate to meet our liquidity and capital needs for at least the next 12 months.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
There were no material changes outside the ordinary course of our business in our contractual obligations or off-balance sheet arrangements during the first quarter of fiscal 2021.
SIGNIFICANT ACCOUNTING ESTIMATES
Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020. The accounting policies used in preparing our interim fiscal 2021 Consolidated Financial Statements are the same as those described in our Form 10-K with the exception of the new accounting requirements adopted in the first quarter of fiscal 2021 related to the measurement of credit losses on financial instruments, including trade receivables. Please see Note 1 to the Consolidated Financial Statements in Part I, Item 1 of this report for additional information.
Our significant accounting estimates are those that have meaningful impact on the reporting of our financial condition and results of operations. These estimates include our accounting for revenue recognition, valuation of long-lived assets, intangible assets, redeemable interest, stock-based compensation, income taxes, and defined benefit pension, other postretirement benefit, and postemployment benefit plans. The assumptions and methodologies used in the determination of those estimates as of August 30, 2020, are the same as those described in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020.
Our annual goodwill and indefinite-lived intangible assets impairment test was performed on the first day of the second quarter of fiscal 2020, and we determined there was no impairment of our intangible assets as their related fair values were substantially in excess of the carrying values, except for the Europe & Australia reporting unit and the Progresso brand intangible asset.
The excess fair value as of the fiscal 2020 test date of the Europe & Australia reporting unit and the Progresso brand intangible asset is as follows:
In Millions
|
|
Carrying Value of Intangible Asset
|
|
|
Excess Fair Value as of Fiscal 2020 Test Date
|
Europe & Australia
|
$
|
672.6
|
|
|
14%
|
Progresso
|
$
|
330.0
|
|
|
5%
|
In addition, while having significant coverage as of our fiscal 2020 assessment date, the Pillsbury brand intangible asset had risk of decreasing coverage. We will continue to monitor these businesses for potential impairment.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2020, the Financial Accounting Standards Board (FASB) issued optional accounting guidance for a limited period of time to ease the potential burden in accounting for reference rate reform. The new standard provides expedients and exceptions to existing accounting requirements for contract modifications and hedge accounting related to transitioning from discontinued reference rates, such as LIBOR, to alternative reference rates, if certain criteria are met. The new accounting requirements can be applied as of the beginning of the interim period including March 12, 2020, or any date thereafter, through December 31, 2022. We are in the process of reviewing our contracts and arrangements that will be affected by a discontinued reference rate and are analyzing the impact of this guidance on our results of operations and financial position.
NON-GAAP MEASURES
We have included in this report measures of financial performance that are not defined by GAAP. We believe that these measures provide useful information to investors, and include these measures in other communications to investors.
For each of these non-GAAP financial measures, we are providing below a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure, an explanation of why we believe the non-GAAP measure provides useful information to investors, and any additional material purposes for which our management or Board of Directors uses the non-GAAP measure. These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable GAAP measure.
Several measures below are presented on an adjusted basis. The adjustments are either items resulting from infrequently occurring events or items that, in management’s judgment, significantly affect the year-to-year assessment of operating results.
Organic Net Sales Growth Rates
We provide organic net sales growth rates for our consolidated net sales and segment net sales. This measure is used in reporting to our Board of Directors and executive management and as a component of the measurement of our performance for incentive compensation purposes. We believe that organic net sales growth rates provide useful information to investors because they provide transparency to underlying performance in our net sales by excluding the effect that foreign currency exchange rate fluctuations, acquisitions, divestitures, and a 53rd week, when applicable, have on year-to-year comparability. A reconciliation of these measures to reported net sales growth rates, the relevant GAAP measures, are included in our Consolidated Results of Operations and Results of Segment Operations discussions in the MD&A above.
Adjusted Operating Profit as a Percent of Net Sales (Adjusted Operating Profit Margin)
We believe this measure provides useful information to investors because it is important for assessing our operating profit margin on a comparable basis.
Our adjusted operating profit margins are calculated as follows:
|
Quarter Ended
|
|
|
Aug. 30, 2020
|
|
|
Aug. 25, 2019
|
|
In Millions
|
|
Value
|
|
Percent of
Net Sales
|
|
|
Value
|
|
Percent of
Net Sales
|
Operating profit as reported
|
$
|
853.7
|
|
19.6
|
%
|
|
$
|
662.4
|
|
16.5
|
%
|
Mark-to-market effects (a)
|
|
(16.4)
|
|
(0.4)
|
%
|
|
|
15.0
|
|
0.4
|
%
|
Investment activity, net (b)
|
|
(13.0)
|
|
(0.3)
|
%
|
|
|
(9.5)
|
|
(0.2)
|
%
|
Product recall (c)
|
|
7.1
|
|
0.2
|
%
|
|
|
-
|
|
-
|
%
|
Restructuring charges (d)
|
|
1.0
|
|
-
|
%
|
|
|
14.3
|
|
0.4
|
%
|
Adjusted operating profit
|
$
|
832.5
|
|
19.1
|
%
|
|
$
|
682.1
|
|
17.0
|
%
|
Note: Table may not foot due to rounding.
(a) Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items. Please see Note 5 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(b) Valuation adjustments of certain corporate investments in fiscal 2021. Valuation adjustments and the loss on sale of certain corporate investments in fiscal 2020.
(c) Product recall costs related to our international Green Giant business.
(d) Restructuring charges for previously announced restructuring actions. Please see Note 2 to the Consolidated Financial Statements in Part I, Item 1 of this report.
Adjusted Operating Profit Growth on a Constant-currency Basis
This measure is used in reporting to our Board of Directors and executive management and as a component of the measurement of our performance for incentive compensation purposes. We believe that this measure provides useful information to investors because it is the operating profit measure we use to evaluate operating profit performance on a comparable year-to-year basis. The measure is evaluated on a constant-currency basis by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given the volatility in foreign currency exchange rates.
Our adjusted operating profit growth on a constant-currency basis is calculated as follows:
|
|
|
|
Quarter Ended
|
|
|
|
|
Aug. 30, 2020
|
|
|
Aug. 25, 2019
|
Change
|
Operating profit as reported
|
|
|
$
|
853.7
|
|
$
|
662.4
|
29
|
%
|
Mark-to-market effects (a)
|
|
|
|
(16.4)
|
|
|
15.0
|
|
|
Investment activity, net (b)
|
|
|
|
(13.0)
|
|
|
(9.5)
|
|
|
Product recall (c)
|
|
|
|
7.1
|
|
|
-
|
|
|
Restructuring charges (d)
|
|
|
|
1.0
|
|
|
14.3
|
|
|
Adjusted operating profit
|
|
|
$
|
832.5
|
|
$
|
682.1
|
22
|
%
|
Foreign currency exchange impact
|
|
|
|
|
|
|
|
Flat
|
|
Adjusted operating profit growth, on a constant-currency basis
|
|
|
|
|
|
|
|
22
|
%
|
Note: Table may not foot due to rounding.
(a) Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items. Please see Note 5 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(b) Valuation adjustments of certain corporate investments in fiscal 2021. Valuation adjustments and the loss on sale of certain corporate investments in fiscal 2020.
(c) Product recall costs related to our international Green Giant business.
(d) Restructuring charges for previously announced restructuring actions. Please see Note 2 to the Consolidated Financial Statements in Part I, Item 1 of this report.
Adjusted Diluted EPS and Related Constant-currency Growth Rate
This measure is used in reporting to our Board of Directors and executive management. We believe that this measure provides useful information to investors because it is the profitability measure we use to evaluate earnings performance on a comparable year-to-year basis.
The reconciliation of our GAAP measure, diluted EPS, to adjusted diluted EPS and the related constant-currency growth rate follows:
|
Quarter Ended
|
Per Share Data
|
|
Aug. 30, 2020
|
|
Aug. 25, 2019
|
Change
|
|
Diluted earnings per share, as reported
|
$
|
1.03
|
$
|
0.85
|
21
|
%
|
Mark-to-market effects (a)
|
|
(0.02)
|
|
0.02
|
|
|
Investment activity, net (b)
|
|
(0.02)
|
|
(0.01)
|
|
|
Product recall (c)
|
|
0.01
|
|
-
|
|
|
Restructuring charges (d)
|
|
-
|
|
0.02
|
|
|
Tax item (e)
|
|
-
|
|
(0.09)
|
|
|
Adjusted diluted earnings per share
|
$
|
1.00
|
$
|
0.79
|
27
|
%
|
Foreign currency exchange impact
|
|
|
|
|
Flat
|
|
Adjusted diluted earnings per share growth, on a constant-currency basis
|
|
|
|
|
27
|
%
|
Note: Table may not foot due to rounding.
(a) Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items. Please see Note 5 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(b) Valuation adjustments of certain corporate investments in fiscal 2021. Valuation adjustments and the loss on sale of certain corporate investments in fiscal 2020.
(c) Product recall costs related to our international Green Giant business.
(d) Restructuring charges for previously announced restructuring actions. Please see Note 2 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(e) Discrete tax benefit related to the reorganization of certain wholly owned subsidiaries. Please see Note 13 to the Consolidated Financial Statement in Part I, Item 1 of this report.
See our reconciliation below of the effective income tax rate as reported to the adjusted effective income tax rate for the tax impact of each item affecting comparability.
Constant-currency After-tax Earnings from Joint Ventures Growth Rates
We believe that this measure provides useful information to investors because it provides transparency to underlying performance of our joint ventures by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given volatility in foreign currency exchange markets.
After-tax earnings from joint ventures growth rate on a constant-currency basis is calculated as follows:
|
|
Percentage Change in
After-Tax Earnings from Joint
Ventures as Reported
|
Impact of Foreign
Currency
Exchange
|
Percentage Change in After-Tax
Earnings from Joint Ventures
on Constant-Currency Basis
|
Quarter Ended Aug. 30, 2020
|
|
89
|
%
|
1
|
pt
|
88
|
%
|
Note: Table may not foot due to rounding.
|
|
|
|
|
|
|
|
Net Sales Growth Rates for Our Canada Operating Unit on Constant-currency Basis
We believe that this measure of our Canada operating unit net sales provides useful information to investors because it provides transparency to the underlying performance for the Canada operating unit within our North America Retail segment by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given volatility in foreign currency exchange markets.
Net sales growth rate for our Canada operating unit on a constant-currency basis is calculated as follows:
|
|
Percentage Change in
Net Sales
as Reported
|
Impact of Foreign
Currency
Exchange
|
Percentage Change in
Net Sales on Constant-
Currency Basis
|
Quarter Ended Aug. 30, 2020
|
|
3
|
%
|
(2)
|
pts
|
5
|
%
|
Note: Table may not foot due to rounding.
|
|
|
|
|
|
|
|
Constant-currency Segment Operating Profit Growth Rates
We believe that this measure provides useful information to investors because it provides transparency to underlying performance of our segments by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given volatility in foreign currency exchange markets.
Our segments’ operating profit growth rates on a constant-currency basis are calculated as follows:
|
|
Quarter Ended Aug. 30, 2020
|
|
|
Percentage Change in
Operating Profit
as Reported
|
Impact of Foreign
Currency
Exchange
|
Percentage Change in Operating
Profit on Constant-Currency
Basis
|
North America Retail
|
|
24
|
%
|
Flat
|
|
24
|
%
|
Europe & Australia
|
|
93
|
%
|
4
|
pts
|
89
|
%
|
Pet
|
|
12
|
%
|
Flat
|
|
12
|
%
|
Asia & Latin America
|
|
99
|
%
|
31
|
pts
|
68
|
%
|
Note: Table may not foot due to rounding.
|
|
|
|
|
|
Adjusted Effective Income Tax Rate
We believe this measure provides useful information to investors because it presents the adjusted effective income tax rate on a comparable year-to-year basis.
Adjusted effective income tax rates are calculated as follows:
|
|
Quarter Ended
|
|
|
Aug. 30, 2020
|
|
|
Aug. 25, 2019
|
In Millions
(Except Per Share Data)
|
|
Pretax
Earnings (a)
|
|
Income
Taxes
|
|
|
Pretax
Earnings (a)
|
|
Income
Taxes
|
As reported
|
$
|
775.9
|
$
|
170.8
|
|
$
|
573.9
|
$
|
67.2
|
Mark-to-market effects (b)
|
|
(16.4)
|
|
(3.8)
|
|
|
15.0
|
|
3.5
|
Investment activity, net (c)
|
|
(13.0)
|
|
(3.0)
|
|
|
(9.5)
|
|
(2.2)
|
Product recall (d)
|
|
7.1
|
|
0.8
|
|
|
-
|
|
-
|
Restructuring charges (e)
|
|
1.0
|
|
0.2
|
|
|
14.3
|
|
2.6
|
Tax item (f)
|
|
-
|
|
-
|
|
|
-
|
|
53.1
|
As adjusted
|
$
|
754.6
|
$
|
165.1
|
|
$
|
593.7
|
$
|
124.2
|
Effective tax rate:
|
|
|
|
|
|
|
|
|
|
As reported
|
|
|
|
22.0%
|
|
|
|
|
11.7%
|
As adjusted
|
|
|
|
21.9%
|
|
|
|
|
20.9%
|
Sum of adjustment to income taxes
|
|
|
$
|
(5.7)
|
|
|
|
$
|
57.0
|
Average number of common shares - diluted EPS
|
|
|
|
619.8
|
|
|
|
|
611.5
|
Impact of income tax adjustments on adjusted diluted EPS
|
|
|
$
|
(0.01)
|
|
|
|
$
|
0.09
|
Note: Table may not foot due to rounding.
(a) Earnings before income taxes and after-tax earnings from joint ventures.
(b) Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items. Please see Note 5 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(c) Valuation adjustments of certain corporate investments in fiscal 2021. Valuation adjustments and the loss on sale of certain corporate investments in fiscal 2020.
(d) Product recall costs related to our international Green Giant business.
(e) Restructuring charges for previously announced restructuring actions. Please see Note 2 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(f) Discrete tax benefit related to the reorganization of certain wholly owned subsidiaries. Please see Note 13 to the Consolidated Financial Statements in Part I, Item 1 of this report.
Glossary
Accelerated depreciation associated with restructured assets. The increase in depreciation expense caused by updating the salvage value and shortening the useful life of depreciable fixed assets to coincide with the end of production under an approved restructuring plan, but only if impairment is not present.
AOCI. Accumulated other comprehensive income (loss).
Adjusted diluted EPS. Diluted EPS adjusted for certain items affecting year-to-year comparability.
Adjusted operating profit. Operating profit adjusted for certain items affecting year-to-year comparability.
Adjusted operating profit margin. Operating profit adjusted for certain items affecting year-over-year comparability, divided by net sales.
Constant currency. Financial results translated to United States dollars using constant foreign currency exchange rates based on the rates in effect for the comparable prior-year period. To present this information, current period results for entities reporting in currencies other than United States dollars are translated into United States dollars at the average exchange rates in effect during the corresponding period of the prior fiscal year, rather than the actual average exchange rates in effect during the current fiscal year. Therefore, the foreign currency impact is equal to current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.
Core working capital. Accounts receivable plus inventories less accounts payable.
COVID-19. Coronavirus disease (COVID-19) is an infectious disease caused by a newly discovered coronavirus. In March 2020, the World Health Organization declared COVID-19 a global pandemic.
Derivatives. Financial instruments such as futures, swaps, options, and forward contracts that we use to manage our risk arising from changes in commodity prices, interest rates, foreign exchange rates, and stock prices.
Euribor. Euro Interbank Offered Rate.
Fair value hierarchy. For purposes of fair value measurement, we categorize assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1:Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
Level 3:Unobservable inputs reflecting management’s assumptions about the inputs used in pricing the asset or liability.
Focus 6 platforms. The Focus 6 platforms for the Convenience Stores & Foodservice segment consist of cereal, yogurt, snacks, frozen meals, frozen biscuits, and frozen baked goods.
Free cash flow. Net cash provided by operating activities less purchases of land, buildings, and equipment.
Free cash flow conversion rate. Free cash flow divided by our net earnings, including earnings attributable to redeemable and noncontrolling interests adjusted for certain items affecting year-to-year comparability.
Generally Accepted Accounting Principles (GAAP). Guidelines, procedures, and practices that we are required to use in recording and reporting accounting information in our financial statements.
Goodwill. The difference between the purchase price of acquired companies plus the fair value of any noncontrolling and redeemable interests and the related fair values of net assets acquired.
Gross margin. Net sales less cost of sales.
Hedge accounting. Accounting for qualifying hedges that allows changes in a hedging instrument’s fair value to offset corresponding changes in the hedged item in the same reporting period. Hedge accounting is permitted for certain hedging instruments and hedged items only if the hedging relationship is highly effective, and only prospectively from the date a hedging relationship is formally documented.
Holistic Margin Management (HMM). Company-wide initiative to use productivity savings, mix management, and price realization to offset input cost inflation, protect margins, and generate funds to reinvest in sales-generating activities.
Interest bearing instruments. Notes payable, long-term debt, including current portion, cash and cash equivalents, and certain interest bearing investments classified within prepaid expenses and other current assets and other assets.
LIBOR. London Interbank Offered Rate.
Mark-to-market. The act of determining a value for financial instruments, commodity contracts, and related assets or liabilities based on the current market price for that item.
Net mark-to-market valuation of certain commodity positions. Realized and unrealized gains and losses on derivative contracts that will be allocated to segment operating profit when the exposure we are hedging affects earnings.
Net price realization. The impact of list and promoted price changes, net of trade and other price promotion costs.
Net realizable value. The estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
Noncontrolling interests. Interests of subsidiaries held by third parties.
Notional amount. The amount of a position or an agreed upon amount in a derivative contract on which the value of financial instruments are calculated.
OCI. Other Comprehensive Income.
Organic net sales growth. Net sales growth adjusted for foreign currency translation, acquisitions, divestitures and a 53rd week impact, when applicable.
Project-related costs. Costs incurred related to our restructuring initiatives not included in restructuring charges.
Redeemable interest. Interest of subsidiaries held by a third party that can be redeemed outside of our control and therefore cannot be classified as a noncontrolling interest in equity.
Reporting unit. An operating segment or a business one level below an operating segment.
Strategic Revenue Management (SRM). A company-wide capability focused on generating sustainable benefits from net price realization and mix by identifying and executing against specific opportunities to apply tools including pricing, sizing, mix management, and promotion optimization across each of our businesses.
Supply chain input costs. Costs incurred to produce and deliver product, including costs for ingredients and conversion, inventory management, logistics, and warehousing.
TCJA. U.S. Tax Cuts and Jobs Act which was signed into law on December 22, 2017.
Translation adjustments. The impact of the conversion of our foreign affiliates’ financial statements to United States dollars for the purpose of consolidating our financial statements.
Variable interest entities (VIEs). A legal structure that is used for business purposes that either (1) does not have equity investors that have voting rights and share in all the entity’s profits and losses or (2) has equity investors that do not provide sufficient financial resources to support the entity’s activities.
Working capital. Current assets and current liabilities, all as of the last day of our fiscal year.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains or incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations and assumptions. We also may make written or oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and in our reports to stockholders.
The words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “plan,” “project,” or similar expressions identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those currently anticipated or projected. We wish to caution you not to place undue reliance on any such forward-looking statements.
In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that could affect our financial performance and could cause our actual results in future periods to differ materially from any current opinions or statements.
Our future results could be affected by a variety of factors, such as: the impact of the COVID-19 pandemic on our business, suppliers, consumers, customers, and employees; disruptions or inefficiencies in the supply chain, including any impact of the COVID-19 pandemic; competitive dynamics in the consumer foods industry and the markets for our products, including new product introductions, advertising activities, pricing actions, and promotional activities of our competitors; economic conditions, including changes in inflation rates, interest rates, tax rates, or the availability of capital; product development and innovation; consumer acceptance of new products and product improvements; consumer reaction to pricing actions and changes in promotion levels; acquisitions or dispositions of businesses or assets; changes in capital structure; changes in the legal and regulatory environment, including tax legislation, labeling and advertising regulations, and litigation; impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets, or changes in the useful lives of other intangible assets; changes in accounting standards and the impact of significant accounting estimates; product quality and safety issues, including recalls and product liability; changes in consumer demand for our products; effectiveness of advertising, marketing, and promotional programs; changes in consumer behavior, trends, and preferences, including weight loss trends; consumer perception of health-related issues, including obesity; consolidation in the retail environment; changes in purchasing and inventory levels of significant customers; fluctuations in the cost and availability of supply chain resources, including raw materials, packaging, and energy; effectiveness of restructuring and cost saving initiatives; volatility in the market value of derivatives used to manage price risk for certain commodities; benefit plan expenses due to changes in plan asset values and discount rates used to determine plan liabilities; failure or breach of our information technology systems; foreign economic conditions, including currency rate fluctuations; and political unrest in foreign markets and economic uncertainty due to terrorism or war.
You should also consider the risk factors that we identify in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended May 31, 2020 which could also affect our future results.
We undertake no obligation to publicly revise any forward-looking statements to reflect events or circumstances after the date of those statements or to reflect the occurrence of anticipated or unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The estimated maximum potential value-at-risk arising from a one-day loss in fair value for our interest rate, foreign exchange, commodity, and equity market-risk-sensitive instruments outstanding as of August 30, 2020 was as follows:
In Millions
|
|
One-day Loss in Fair Value
|
|
Change During Quarter Ended Aug. 30, 2020
|
|
Analysis of Change
|
Interest rate instruments
|
$
|
70
|
$
|
(9)
|
|
Lower Market Volatility
|
Foreign currency instruments
|
|
23
|
|
4
|
|
Higher Market Volatility
|
Commodity instruments
|
|
4
|
|
1
|
|
Immaterial
|
Equity instruments
|
|
4
|
|
(1)
|
|
Immaterial
|
For additional information, see Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended May 31, 2020.
Item 4. Controls and Procedures.
We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of August 30, 2020, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the quarter ended August 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.